State Auto Financial (STFC)

Non-Qualified Stock
Options. In general, for federal
income tax purposes under present law:

(a) The grant of a non-qualified stock
option, by itself, will not result in income to the optionee.

(b) Except as provided in (e) below,
the exercise of a non-qualified stock option (in whole or in
part, according to its terms) will result in ordinary income to
the optionee at that time in an amount equal to the excess (if
any) of the fair market value of the shares underlying the
option on the date of exercise over the exercise price.

(c) Except as provided in (e) below,
the optionees tax basis of shares acquired upon the
exercise of a non-qualified stock option, which will be used to
determine the amount of any capital gain or loss on a future
taxable disposition of such shares, will be the fair market
value of the shares on the date of exercise.

(d) No deduction will be allowable to the
Company upon the grant of a non-qualified stock option, but upon
the exercise of a non-qualified stock option, a deduction will
be allowable to the Company at that time in an amount equal to
the amount of ordinary income realized by the optionee
exercising the option if the Company withholds appropriate
federal income tax and provided that the deduction is not
otherwise disallowed under the Code.

(e) With respect to the exercise of a
non-qualified stock option and the payment of the exercise price
by the delivery of shares, to the extent that the number of
shares received does not exceed the number of shares
surrendered, no taxable income will be realized by the optionee
at that time, the tax basis of shares received will be the same
as the tax basis of shares surrendered, and the holding period
of the optionee in shares received will include his or her
holding period in shares surrendered. To the extent that the
number of shares received exceeds the number of shares
surrendered, ordinary income will be realized by the optionee at
that time in the amount of the fair market value of such excess
shares, the tax basis of such shares will be equal to the fair
market value of such shares at the time of exercise, and the
holding period of the optionee in such shares will begin on the
date such shares are transferred to the optionee.